Although crude oil prices are down from their mid-2022 highs due to concerns over global economic growth, an earlier-than-expected return to growth for Europe aided by an expedited reopening of the Chinese economy is expected to keep demand stable.
Moreover, almost a year has passed since the conflict between Russia and Ukraine started polarizing a global economy that was still recovering from the pandemic setback and redrawing the global energy map. Global energy supplies will remain constrained, with hostilities set to intensify in the spring.
Record Q2 earnings posted by British Petroleum have echoed the stellar performance of other energy majors, indicating enduring tailwinds driving a windfall for the entire industry. Such tailwinds bode well for energy companies like Valero Energy Corporation (VLO).
VLO is involved in manufacturing, marketing, and selling transportation fuels and petrochemical products in domestic and international markets. It operates in three segments: Refining; Renewable Diesel; and Ethanol. Its offerings include conventional, premium, and reformulated gasoline; California Air Resources Board (CARB) gasoline and diesel; and other refined petroleum products.
Let’s closely examine the factors that make it worthy of investment.
Robust Financials
VLO’s revenues increased 16.3% year-over-year to $41.75 billion in the fiscal 2022 fourth quarter ended December 31, 2022. During the same period, the company’s operating income improved 169.4% year-over-year to $4.30 billion, while its adjusted net income amounted to $3.2 billion, up 223.9% year-over-year.
The company’s adjusted quarterly earnings per share came in at $8.45, registering an increase of 250.6% from the prior-year period.
Excellent Track Record
Over the past three years, VLO’s revenue has grown at a 19.7% CAGR, while its EBITDA has grown at a stellar 43.7% CAGR.
The company’s net income and EPS increased at 68.2% and 70.6% CAGRs, respectively, during the same period.
Favorable Analyst Estimates
Analysts expect VLO’s revenue for the first quarter of fiscal 2023 to increase 2.1% year-over-year to $39.34 billion. During the same period, the company’s EPS is expected to increase by 184% year-over-year to $6.56.
VLO has also impressed by topping the consensus estimates in each of the trailing four quarters.
Effective Asset Utilization for Improving Profitability
VLO’s trailing-12-month gross profit margin of 10.90% is higher than its 5-year average of 5.84%. Likewise, the company’s trailing-12-month EBITDA and net income margins of 10.32% and 6.54% also surpass the respective 5-year averages of 5.18% and 1.98%.
MPC’s trailing 12-month return on common equity of 57.15% is 169.7% higher than the industry average of 21.19%. The company’s trailing 12-month return on total capital of 28.03% compares favorably with the industry average of 8.53%, while its trailing 12-month return on total assets of 19.43% also beats the industry average of 7.01%.
Impressive Price Performance
VLO’s stock is currently trading above its 200-day moving average of $120.94, indicating a bullish trend. The stock has gained 20.4% over the past six months and 42.9% over the past year to close the last trading session at $128.09.
Attractive Valuation
Despite the recent uptrend in its price, in terms of forward non-GAAP P/E, VLO is currently trading at 5.93x, 26.2% lower than the industry average of 8.04x. The stock’s forward EV/Sales and EV/EBITDA of 0.38x and 4.40x are 78.3% and 19.4% lower than the industry averages of 1.75 and 5.46, respectively.
Also, its forward Price/Sales multiple of 0.32 compares favorably to the industry average of 1.30.
Such low valuations give VLO’s stock headroom for potential upside.
POWR Ratings Reflect Stellar Prospects
VLO’s overall A rating translates to a Strong Buy in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Our proprietary rating system also evaluates each stock based on eight distinct categories. VLO has an A grade for Momentum, consistent with its impressive price action.
In addition, the stock has grade B for Growth and Sentiment, in sync with its robust financials, impressive track record, and favorable analyst estimates. Its attractive valuation and decent profitability through effective asset utilization have also earned it a B grade for Value and Quality.
VLO ranks #4 of 93 stocks in the B-rated Energy – Oil & Gas industry. Click here to see all POWR Ratings for VLO.
Bottom Line
In addition to its strong fundamentals and multiple tailwinds acting in line to keep demand strong, VLO’s consistently improving operational and commercial execution keeps it in good stead for the upcoming quarters.
To build on the momentum, VLO commissioned the DGD Port Arthur plant, which has a production capacity of 470 million gallons per year of renewable diesel and 20 million gallons per year of renewable naphtha, in the fourth quarter. The project was completed under budget and ahead of the original schedule.
Therefore, it could be wise to invest in this energy stock now.
How Does Valero Energy Corp. (VLO) Stack up Against Its Peers?
VLO has been rated B, equating to a Buy. Check out these other stocks within the Energy- Oil & Gas industry with an A (Strong Buy) rating: Marathon Petroleum Corporation (MPC), PrimeEnergy Resources Corporation (PNRG), and Epsilon Energy Ltd. (EPSN).
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VLO shares were trading at $132.12 per share on Tuesday afternoon, up $4.03 (+3.15%). Year-to-date, VLO has gained 4.15%, versus a 6.76% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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